Although data analysis has been used for many years across the industry, Artificial Intelligence (AI) rapidly expands the amount of data that can be analysed and has the power to completely revolutionise the industry as insurance specialists are replaced by machines. AI also has the potential to improve claims processing and help prevent fraud.
Different consumers have unique requirements and risk profiles, and as algorithms become more powerful they allow insurers to price policies on an individual basis much more accurately. For instance in the life insurance market, it is anticipated that social media profiles could be increasingly used to predict lifestyle habits and risks.
Big data also has the power to transform other insurance markets such as the motor industry, especially once the autonomous driving market takes off and insurers can collect data from cars and use it to assess how risky those vehicles are.
We have already seen investment in companies that enable better pricing of risk such as producers of telematics boxes in cars. One such deal saw Inflexion Private Equity back the management buyout of My Policy, a provider of broking, product design, pricing and monitoring of telematics motor insurance policies for first time drivers in the UK. The business sources insurance policies and manages the installation of smart boxes to monitor and analyse driving behaviour.
The use of big data, in combination with mapping technologies, also has the power to transform areas such as flood risk, while drone technology is already revolutionising crop insurance as plant health can be checked from the air.
These advances are also linked to the emergence of the Internet of Things – the concept of using sensors and other technologies to link just about any machine to the internet. In particular these technologies allow insurers to better predict problems in both homes and factories and then fix them before they occur, so reducing their risk profile.
The global WannaCry ransomware attack earlier this year, which hit more than 200,000 computers in 150 countries, is expected to further boost demand for cyber insurance as companies take a closer look at their vulnerability to an attack. At present the global market generates about $3bn-$4bn (€2.5bn-€3.3bn) in premiums annually, but Allianz expects the market to be worth $20bn (€16.6bn) by 20251.
It says businesses must prepare for a new generation of cyber risks which are fast evolving, moving beyond the established threats of data breaches, privacy issues and reputational damage to operational and business interruption and potentially catastrophic losses.
As recently as 15 years ago, cyber-attacks were fairly rudimentary and typically the work of hacktivists, but with increasing interconnectivity, globalisation and the commercialisation of cyber-crime there has been an explosion in both frequency and severity of cyber-attacks.
European countries have traditionally been slower to buy cyber companies than in the US where demand has been driven by regulations on cyber-attack disclosures. However, demand in Europe is now expected to be boosted by the EU’s general data protection regulation (GDPR) which comes into force in 2018 and which imposes tough penalties on companies that suffer a data breach.
Against the backdrop of data, assurtech and cyber risks, the French market has seen a digital metamorphosis, creating opportunities for insurance companies and pushing them to develop insurance solutions connected to new technologies, for example in the car insurance segment. Large insurers such as Allianz and AXA are among the most aggressive in the field of innovation as they seek to gain ground on bank insurers and emerging players.
The International Accounting Standards Board recently launched a new set of regulations, IFRS 17, in a bid to simplify insurers’ complex financial statements and enable investors to better compare companies in different countries. The move is particularly expected to impact life insurers as previously profits from annuities were recognised upfront, but under the new regulations the profits have to be spread across the life of the contract. However given its complexity, the new standard is not expected to be effective until at least 2020.
Innovation is sweeping across new categories of insurance in response to fast-moving changes in consumer behaviour, the power of mobile technology, and the emergence of the sharing economy. For instance in recent times we have seen the growth of on-demand car insurance by the hour, and rental insurance for the likes of Airbnb.
One recent deal saw LocalGlobe lead a funding round for Scottish start-up Cuvva which provides subscription-based car insurance aimed at customers who use vehicles infrequently or borrow them from friends and family. The company offers hourly car insurance sold through a mobile app.
1: Allianz – A Guide to Cyber Risk: Managing the impact of increasing interconnectivity